11755-7(sn)
TELEPHONE 954-8585
FACSIMILE 990-1233
XXXXX May 17, 1995
Dear XXXXX
This is in response to the September 23, 1992 memorandum from XXXXX , wherein our comments were requested with respect to the application of tax to transactions involving the XXXXX , XXXXX employees and XXXXX . We have reviewed the documentation provided and our comments follow. Please accept our apologies for the delay in our response.
Background
1) As a clause in its employment contract with employees, XXXXX agrees to provide a dry cleaning allowance of a specific amount, to employee operators and despatchers. The allowance takes the form of vouchers which the employee presents to a dry cleaner.
2) A facsimile of a voucher that would be given to an employee indicates a face value of $ XXXXX and no disclosure of whether the $ XXXXX contains GST.
3) In an agreement between XXXXX and XXXXX , XXXXX agrees to provide dry cleaning services for specific XXXXX employee operator/despatcher uniforms and to accept vouchers presented by XXXXX employees in circumstances where the total cost of the cleaning is equal to or exceeds the value of the vouchers. Where the total cost of the cleaning exceeds the value of the voucher, the excess is to be paid for by the employee.
4) At the end of each month, XXXXX submits an invoice to XXXXX to request payment equal to 90% of the total value of all of the vouchers accepted during the month.
Questions
XXXXX asked that the following issues be addressed:
1) Should XXXXX charge the employee GST on the face value of the voucher XXXXX ?
2) Should XXXXX charge GST on the invoice submitted to XXXXX
3) Can XXXXX claim a full input tax credit or the 57.14% rebate for municipalities?
4) Should "GST included" be printed on the face of the voucher being presented by the employee?
Discussion
Two drafts of a possible response have been provided for our comments. The first draft treats the transactions between XXXXX , its employees and XXXXX as being the taxable supply of dry cleaning services to the employee, a portion of which is paid for with a tax-included voucher which XXXXX submits to XXXXX for reimbursement without tax implications. The second draft attempts to treat the voucher being presented by the employee, as a coupon with tax applicable under the rules of section 181 of the Excise Tax Act ("ETA").
The transaction cycle which tracks the movement of the voucher under review, from XXXXX , through to the other parties and ultimately back to XXXXX , can be summarized as follows:
1) The first transaction occurs between XXXXX and the employee.
2) The second transaction occurs between the employee and XXXXX
3) The third transaction occurs between XXXXX and XXXXX
The Transaction Between XXXXX and the Employee XXXXX is making a supply of property in the form of a right to dry cleaning services, to the employee. The employee is providing employment services. From the perspective of the employee, pursuant to subsection 123(1) of the ETA, the supply of employment services is neither the supply of a service or of property, and as a consequence, the employee is not required to collect tax from XXXXX in respect of the supply. However, from the perspective of XXXXX the employment services are non-monetary consideration being given by the employee in order to receive the supply of the voucher.
Although the employment services are not in and of themselves, a supply, there is nothing in the GST legislation to prevent them from being consideration given for another supply. Subsection 153(2) sets out the rules for attributing consideration in circumstances where it is being given to receive more than one supply or matter. The use of the term "matter", in the wording of the provision anticipates that consideration can be given to receive something which is not a supply. One could possibly view the employment services as consideration given to receive a salary from XXXXX and to receive a dry cleaning voucher. However, as consideration, it is reasonable to attribute the employment services completely to the receipt of a salary (i.e. money). The payment of money is by definition at subsection 123(1), not a supply, but it can be a matter for which consideration can be given. Consequently, the value of consideration attributed to the taxable supply of the voucher would be zero. No tax is payable by the employee when he receives the voucher.
The Transaction Between the Employee and XXXXX
Once the employee has possession of the voucher, and uses it to partially or completely pay for approved dry cleaning services, the supply made by XXXXX to the employee must be reviewed for the application of tax.
It is at this point in the transaction cycle that the rules of section 181 would be considered. Section 181 starts from the point in the cycle where a person has possession of a coupon and then uses it to reduce the price charged for the supply of a property or service. Section 181 is silent as to the tax treatment of the movement of the coupon from the issuer to the person who will be using it.
Given the background provided, it might appear that the voucher could be treated as a reimbursable coupon under the provisions of subsection 181(2).
To qualify as a reimbursable coupon, use of the coupon must entitle the recipient of a taxable supply to a reduction of the price of that supply. In considering whether this requirement has been met, note should be made of the following.
A contract between XXXXX and XXXXX states that XXXXX "shall provide for the cleaning of XXXXX uniforms". The second and third transactions in the cycle should be viewed as the taxable supply of dry cleaning services for which there are potentially two recipients, with each recipient responsible for tax on that portion of the consideration payable for the taxable supply, which he is liable to pay.
Under subsection 165(1), tax is payable by the recipient of a taxable supply. Pursuant to the definition of recipient in subsection 123(1), as both XXXXX and the employee may be liable to pay consideration (or more specifically, a portion thereof) for the dry cleaning, both qualify as recipients in such a case. Although it is the exception rather than the rule, to have two recipients for one supply, there is no statutory requirement that a supply have only one recipient.
Returning to the question of the application of subsection 181(2), reading the provision from the perspective of the employee, to the extent that the employee is a recipient, he does not receive a reduction in the price of his dry cleaning. The full price of the employee's dry cleaning is any cash balance to be paid after presentation of the voucher. XXXXX has agreed to be responsible for the payment of that portion of the price which the voucher represents. As a consequence, XXXXX is also a recipient of a portion of the supply. From the perspective of XXXXX , there is also no reduction in the price of the dry cleaning. XXXXX pays the full amount of the invoice received from XXXXX . The use of the voucher, regardless of whose perspective it is viewed from, does not meet the requirements as set out under subsection 181(2). Neither recipient is entitled to a reduction of the price that they would otherwise be charged for the dry cleaning.
Under certain circumstances, coupons which do not qualify under subsection 181(2), qualify under subsection 181(4). However, the XXXXX voucher will be disqualified under subsection 181(4) for the same reasons which existed to disqualify the voucher under subsection 181(2). There are potentially two recipients of the supply and neither receives a reduction of, or a discount on, the price to be paid for a taxable supply of property or a service.
The Transaction Between XXXXX and XXXXX
XXXXX is billing XXXXX for dry cleaning services which XXXXX contracted for. If XXXXX and XXXXX agree that the invoiced amount is to be treated as tax included, then the invoice should, pursuant to subsection 223(1), indicate that fact. Otherwise, XXXXX would calculate tax on the amount of the invoice,
Given this analysis of the transactions, our comments with respect to the specific questions asked by XXXXX , are as follows.
XXXXX should not charge the XXXXX employee GST on the face value of the voucher. The XXXXX employee is liable for the tax on that portion of the supply of dry cleaning services which he is the recipient of. The portion of the supply which the employee is liable for would usually be evidenced by the amount of money paid by the employee. The voucher represents the portion of the supply for which XXXXX has contracted to receive.
XXXXX should charge GST on the amount invoiced to XXXXX , unless there is provision in the agreement that the amount shown on the invoice is tax-included and proper disclosure of that fact, is given.
With regard to whether XXXXX can claim a full input tax credit or the 57.14% rebate for municipalities, the general comments you have provided to XXXXX as to the availability of input tax credits and the calculation of pro-rated amounts, are correct. However, as was also discussed, a supply of a municipal transit service or a public passenger transportation service is an exempt supply under the provisions of paragraph 24, Part VI, Schedule V. To the extent that XXXXX is making exempt supplies, no input tax credit claims would be available. It is therefore reasonable to anticipate that some type of prorating of input tax credit claims will be necessary and that the actual amount of any input tax credit claim would be relatively small.
As identified, the alternate action for XXXXX , is the rebate available under the provisions of section 259.
The employee is giving employment services to XXXXX in order to receive the voucher, however, from the facts provided, there appears to be no requirement for the employee to include any amount in his income for income tax purposes. Although the voucher is called an allowance, the employee does not have any discretion to use the voucher for anything else but for full or partial payment of dry cleaning services purchased in respect of his XXXXX uniforms. There is usually no requirement to include such an allowance in employment income under the provisions of subparagraph 6(1)(b) of the Income Tax Act. For purposes of calculating a taxable benefit under the provisions of subsection 6(1)(a) of the Income Tax Act, IT Bulletin 470R Employee fringe benefits specifically excludes the direct payment of a dry cleaner by an employer, on account of employee dry cleaning.
If the voucher being issued by XXXXX was required to be included in the employment income of the employee and XXXXX was subject to the rules of section 170, to the extent that input tax credits could be calculated, no claim would be allowed, and the definition of prescribed property and services contained in the Public Service Body Rebate Regulations would prevent XXXXX from claiming a rebate to the issuance of the voucher to the employee.
With respect to the final question posed by XXXXX , "GST included" should not be printed on the face of the voucher being presented by the employee. The employee is only paying tax on that portion of the dry cleaning services for which he is the recipient. The voucher represents the portion of the service for which XXXXX is the recipient. XXXXX raises an invoice to XXXXX which is an amount other than the face value of the voucher and is required to charge tax on that amount.
Since we have received this request through the XXXXX Region, we have provided a copy of this correspondence to them. Should you require any further assistance in this matter, contact one of the members of the Application Team in the Tax Provisions Unit. They are: Lalith Kottachchi (613) 952-9588, Ken Mathews (613) 952-9585, Suzanne Leclaire (613) 954-7931, and Sara Nixon (613) 954-4397.
Yours truly,
H.L. Jones
Director
General Applications Division
GST Rulings & Interpretations
XXXXX Mitch Bloom
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